Economic Environment Report of GTR 2015: Fostering Economic Cooperation in Northeast Asia in the new Global Environment

Transcription

1 Economic Environment Report of GTR 215: Fostering Economic Cooperation in Northeast Asia in the new Global Environment Korea Institute for International Economic Policy Bo-young Choi*, Jangho Choi**, Boram Lee***, Yoojeong Choi****, and Chihyun Yun***** * Head of Team, Cooperation Policy Team, Department of Northeast Asian Economies, Korea Institute for International Economic Policy. Sejong National Research Complex, 37, Sicheong-daero, Sejong-si,Korea, 3147.bychoi@kiep.go.kr * Research Fellow, International Cooperation for Korean Unification Team, Department of Northeast Asian Economies, Korea Institute for International Economic Policy. Sejong National Research Complex, 37, Sicheong-daero, Sejong-si,Korea, choi.j@kiep.go.kr *** Senior Researcher, Cooperation Policy Team, Department of Northeast Asian Economies Korea Institute for International Economic Policy. Sejong National Research Complex, 37, Sicheong-daero, Sejong-si,Korea, brlee@kiep.go.kr **** Researcher, International Cooperation for Korean Unification Team, Department of Northeast Asian Economies, Korea Institute for International Economic Policy. Sejong National Research Complex, 37, Sicheong-daero, Sejong-si,Korea, choiyj@kiep.go.kr ***** Researcher, Russia and Eurasia Team, Department of Europe, Americas and Eurasia, Korea Institute for International Economic Policy. Sejong National Research Complex, 37, Sicheong-daero, Sejong-si,Korea, chyun@kiep.go.kr 1

2 About Korea Institute for International Economic Policy The Korea Institute for International Economic Policy (KIEP) was founded in 199 as a governmentfunded economic research institute. It is a leading institute concerning the international economy and its relationship with Korea. KIEP advises the government on all major international economic policy issues and serves as a warehouse of information on Korea s international economic policies. Further, KIEP carries out research by request from outside institutions and organizations on all areas of the Korean and international economies by request. KIEP continually strives to increase its coverage and grasp of world economic events, and expanding cooperative relations has been an important part of these efforts. In addition to many joint projects in progress KIEP is aiming to become a part of a broad but close network of the world s leading research institutes. This research project was funded by the Ministry of Strategy and Finance, Korea from June to December 215. The authors would like to thank the GTI Secretariat for their helpful comments and suggestions on the overall research direction. 2

3 Contents ( 페이지수추가부탁드립니다 ) 1. Economic Overview in Northeast Asia 2. Trade and Investment Conditions in Northeast Asia 3. Republic of KOREA 3.1 Economic Overview 3.2. Trade 3.3 Foreign Direct Investment 3.4 Regional Level Statistics of Republic of KOREA 4. China 4.1 Economic Overview 4.2. Trade 4.3 Foreign Direct Investment 4.4 Regional Level Statistics of Republic of KOREA 5. Russian Federation 5.1 Economic Overview 5.2. Trade 5.3 Foreign Direct Investment 5.4 Russian Far East Economy 6. Mongolia 6.1 Economic Overview 7. Japan 8.DPRK 3

4 <Tables> ( 페이지수추가부탁드립니다 ) <Figures> ( 페이지수추가부탁드립니다 ) 4

5 1. Economic Overview in Northeast Asia The world GDP growth plummeted down to a -2% in 29 due to the Global Financial Crisis, bounced back to 4% in 21 and have been remaining at a growth rate higher than 2% but lower than 3% until 214. The World Bank estimates that global growth is expected to rise in 215 to 3 % and to be sustained at 3.2~3.3% in 216~217. The sharp decline in oil prices since mid-214 is projected to be sustained and to contribute to global growth, with significant shifts from oil-exporting to oil-importing economies. 1 As a result of falling oil prices, Russia, one of the major oil-exporting economies, faces economic slowdown. Contrary to the high growth rate prior to the Global Financial Crisis, the economic growth of Russia started to decline again in 211. In addition to oil prices, the conflict between Russia and Ukraine led to series of sanctions which negatively affected Russia s trade and investment leading to lower growth in 214. China s growth rate has shown a downward trend since 27, and the Chinese government targets the growth rate at a range of 6.5% to 7.% for 216. Since 214, China is undergoing financial reforms tightening regulation and supervision, along with land and state-owned enterprises reform. World Bank estimates that the reform agenda has the potential to raise output by 2~3% in the long run, but may dampen short run growth due to firms adjustment of new prices by factor reallocation across sectors. A sharp slowdown in the Chinese economy is pointed out to have a threatening impact on the East Asian region which is highly dependent on the country s large commodities demand. Mongolia as a country relying much on commodity exports is experiencing lower economic growth since its peak in 2ll partly attributed to lower international commodity prices and slowing 1 World Bank estimates that a 3 percent decline in oil prices (as projected for 215) could be associated with an increase in global GDP by about.5 percent. 5

6 global demand including China, a major buyer of commodities. ADB and World Bank forecast that Mongolia s growth to be lower or weak in , reflecting a deteriorating external environment, drought-affected harvests, and tight monetary and fiscal policies. On the positive side, however, recovery in foreign investment is expected to begin to support the non-mining sector growth. ROK s economic annual growth rate tends to be relatively flat around at 3% during except for the Global Financial Crisis in Real exports are stagnating because of lower global demand, especially lower demand from its major trading partner, China. Furthermore, the outbreak of the Middle East Respiratory Syndrome (MERS) reduced output growth this year. OECD estimates GDP growth rate of Korea to be 2.75% in 215 but to increase to 3% in 216 and 3.5% by 217 due to pick-up in private consumption. The Japanese economy is suffering from the so-called Lost two decades since the 199s. Throughout 25 to 214 the growth rate is lower than the world most of the time; the average annual growth rate records only.6% average annual growth during the period. The sales tax increase in April 214 affected the Japanese economy negatively to revive recording -.3% growth in 214 despite a weak yen. Since Japan is a major trade partner for GTI members, the risk of Japan relapsing into stagnation threatens the growth prospects in the GTR. As for DPRK, the growth rate remains very low throughout exhibiting negative growth rates for some years and close to zero growth in other years. A primary reason for the poor performance is sanctions imposed by the UN due to North Korea s military threats starting from its nuclear experiment in 26. The 5.24 measures imposed by the ROK government in 21 have also worsened the trade and growth performance of DPRK. 6

7 Figure 1.1 Trend of growth rate of World and GTI members+2(dprk, Japan) China DPRK Japan Mongolia ROK Russia World Although comparing country level statistics can be an indicator to analyze and forecast Northeast Asia economy, regional statistics may better reflect the conditions of the GTR. The GTR s GRDP share of GTI members GDP is quite low implying that the GTR have lagged behind the growth of each member countries. Meanwhile, the GRDP growth rate of GTR is 5.55%, higher than the aggregate GDP growth rate of member countries growth rate 4.12% and world GDP growth rate 2.18% in 212. In other words, GTR consists of sub-regions of GTI member countries that are underdeveloped but with great development potential. GTR, rich with natural gas, coal and other resources along with abundant land, has a high growth potential in the region. However, political instability which causes uncertainty in the trade and business environment is pointed out as a major obstacle to attract investment and expand trade in the region to spur regional economic growth. 7

8 % Table 1.1 Comparison of GDP and GRDP GDP GRDP DPRK 13,233 13,233 (N/A) Russia 98,69 53,51 (5.41%) ROK 1,165, ,651 (18.85%) Japan 4,695,356 97,663 (2.8%) China 4,578, ,68 (12.42%) Mongolia 4,562 4,562 (N/A) Unit: million USD Note: Share of GRDP out of country s GDP in the parentheses. Data for GRDP for DPRK and Mongolia not available. 2. Trade and Investment Conditions in Northeast Asia Tariff rates has fallen for all GTI countries since 1997 while China and Russia s tariff rates dropped dramatically as these two countries acceded to the WTO relatively recently. The average MFN applied tariff rates remain lower than 1% for all GTI countries since 29. Figure 2.1 MFN applied tariff rates China Mongolia Russian Federation Japan Korea Rep. 8

9 Given lower tariff rates in the region, trade facilitation broadly defined as the set of policies aiming at reducing trade costs other than tariffs--has drawn much attention to reduce trade costs in developing countries. Based on the broad definition, trade facilitation can be undertaken along two dimensions: hard infrastructure and soft infrastructure. Hard infrastructure includes tangible infrastructures such as roads, railways and airport while soft infrastructure includes custom procedures, transparency and business environment. Hard infrastructure is especially important for the GTR (Greater Tumen Region) as it includes large areas of land which is far away from sea ports and hence has relatively less access to the rest of the world. For instance, Mongolia is a landlocked country and Heilongjiang, Jilin and Inner Mongolia are landlocked provinces of China in the GTR. Despite the importance, some GTI countries are known to lack good quality hard infrastructure. Road density of Mongolia is only 3.2km/1km 2 and railway density is only 1.2km/1km 2. In addition to the low coverage of railways compared to total area of land, the fact that Mongolia and China use two different rail gauges (Mongolia using broad gauge and China using narrow gauge) has been pointed out to be a major obstacle of trade between the two countries. 9

10 Table 2.1 Hard Infrastructure ROK China Russian Fedration Mongolia Japan DPRK Population (million) 49. 1, Total Area (1 km 2 ) , ,98.2 1, Roadways Railways Airport Land , , , Water total(1km) 15. 4,16.4 1, , Road Density (km/1km 2 ) 1, , total(km) 3,381 86, 87,157 1,98 27, Railway Density (km/1km 2 ) Total , Airport with paved runways Major Ports Busan, Incheon, Gunsan, Kwangyang, Mokpo, Pohang, Ulsan, Yeosu Dalian, Ningbo, Qingdao, Qinhuangdao, Shanghai, Shenzhen, Tianjin Kaliningrad, Nakhodka, Novorossiysk, Primorsk, Vostochnyy - Chiba, Kawasaki, Kobe, Mizushima, Moji, Nagoya, Osaka, Tomakomai, Yokohama 39 Ch'ongjin, Haeju, Hungnam (Hamhung), Namp'o, Tokyo, Senbong, Songnim, Sonbong (formerly Unggi), Wonsan Note: 1. Population is estimate of July Data for Roadways: ROK(29), China(211), Russia(212), Mongolia(21), DPRK (26) 3. Data for Railways: ROK, China(28), Russia(26), Mongolia(213), DPRK (214) 4. Airport: 213 Data: CIA, The World Factbook. In terms of soft infrastructure in the region and narrower sense of trade facilitation, ROK has ranked the 31 th efficient country in custom procedures by World Bank Doing Business 216 (survey conducted in June 215). For ROK, Only an hour is required to complete import procedures and 14 hours to export. ROK is followed by Japan (52th), Mongolia (74 th ), China (96 th ) and Russia (17 th ) among GTI members. For the 216 survey, Austria ranked number 1 in custom efficiency as its custom requires only 1 hour for both import and export procedures and records USD for cost to import and export. 1

11 Table 2.2 Custom Efficiency Country Rank Time to export: Time to Import: Cost to Import: Cost to Export: Documentary Documentary Border Border Compliance Compliance Compliance Compliance (USD) (hours) (hours) (USD) ROK China Russia , Mongolia Japan Data: World Bank, Doing Business 216 [online]. (accessed on: ) Along with political instability, investment conditions of the GTI countries have been pointed out to be a cause of hindrance to attract foreign investment to the region. Although China is one of the largest global FDI recipients, indicators suggest that there is still room for improvement, particularly in the areas of business regulations. It ranks relatively low in starting a business, dealing with construction permits, getting electricity, protecting minority investors, paying taxes although this may vary much by provinces. Other transition economies, Russia and Mongolia rank 51th and 56 th respectively with some improvement from prior year. 11

12 Table 2.3 Custom Efficiency China ROK Japan Russian Federation Mongolia Starting a Business 136 (127) 23 (16) 81 (77) 41 (34) 36 (4) Dealing with Construction Permits 176 (177) 28 (3) 68(66) 119 (117) 25 (27) Getting Electricity 92 (86) 1 (1) 14(14) 29 (53) 134 (136) Registering Property 43 (41) 4 (38) 48(47) 8 (8) 44 (43) Getting Credit 79 (71) 42 (36) 79(71) 42 (61) 59 (61) Protecting Minority Investors 134 (133) 8 (8) 36(33) 66 (64) 8 (8) Paying Taxes 132 (133) 29 (27) 121(12) 47 (5) 91 (87) Trading Across Borders 96 (96) 31 (3) 52(51) 17 (169) 74 (73) Enforcing Contracts 7 (7) 2 (2) 51(51) 5 (5) 8 (8) Resolving Insolvency 55 (53) 4 (5) 2(2) 51 (44) 89 (88) Overall 84 (83) 4 (4) 34(3) 51 (54) 56 (59) Data: World Bank, Doing Business 216 [online]. (accessed on: ) Note: 215 rank in parentheses. 12

13 3. Republic of KOREA 3.1 Economic Overview Korea, a country with a population of 5.4 million, is recognized for its economic achievement. From one of the world s poorest countries in the 196s, it has grown to be the 13 th largest economy in the world in terms of nominal GDP (US$ 1,41 billion). The country recorded a US$ 1,239 billion real GDP in 214 which is a 3.27%p increase from 213, and its GDP per capita is US$ 28,598 (US$ 34,356 in terms of PPP, current international $, UNCTAD). 2 Korea s economic growth is largely led by its export-oriented growth strategy, encouraging large Korean conglomerates growth in sectors of heavy-industry and manufacturing industry s exports. In Forbes 2 company lists, 66 Koreans companies were listed in 215 including Samsung Electronics and Hyundai Motor; this number is the fourth largest in the world, only after the United States, China, Japan, and England. Korea s economic expansion regained strength in 213 and 214 by recording 2.97% and 3.27% respectfully after a period of subdued growth in 212 by 2.29%. Sustained growth in 214 was largely driven by private and government consumption and investment, mainly in plant and equipment and consumption. Private and government consumption, while its pace slightly decreased due to sluggish domestic demand, continued to account for 1.3%p of growth, while investment contributed 1.5%p. Meanwhile, the contribution of net exports to GDP growth decreased from 1.5%p in 213 to.5%p in 214. This recent contraction was partly caused by the sluggish export environment of Korea s main export markets including China and the EU. 2 UNCTAD Statistics. 13

14 Figure 3.1 Trend of Korea s GDP and GDP growth 1,4, 1,2, 1,, 8, 6, 4, 2, Unit: million USD(left), %(right) Real GDP (million USD) 712,756 1,98,694 1,139,144 1,165,258 1,199,879 1,239,115 GDP growth (%) Source: UNCTAD Stat. ( ) Despite robust economic growth shown in the recent two years, Korean economy faces structural problems such as low growth in terms of GDP and population and weakening growth momentum. The population growth rate is under 1%, recording.4% growth in 214, and its economic growth rate is at a declining trend from 6.2% in the 199s to 4.34% in 2s. More recently the growth rate showed an average 3.46% growth rate from 28~14 while the world growth rate recorded 2.18% during the same period. In February 214, the Korean government adopted the Three Year Plan for Economic Innovation to overcome the structural problems and regain the growth momentum. The plan includes the following three strategies: (a) fair and efficient economy; (b) growth through innovation; and (c) balance between exports and domestic consumption. 14

15 3.2. Trade Korea continues to pursue an outward oriented, opened economic policy. The country s share of trade in goods and services of Korea s GDP reached at 12.77% of its total GDP in 213, which is an increase from 67.95% in 2 (World bank). Korea ranked the eighth largest trading countries in the world in 214. To be more specific, Korea was the sixth largest exporter and the ninth largest importer in the world. The subdued trend of world trade since 212 has reflected Korea s trade in goods in volume terms. However, Korea s share of world trade continued a general increasing trend from 2.76% and 2.49% in 2 to 3.16% and 2.83% in 214 in terms of export and import, respectfully. Figure 3.2 Trend of Korea s Export (FOB) Unit: million USD(left), %(right) 7, 6, 5, 4, 3, 2, 1, Korea (million USD) 172, , , ,86 559, ,651 Share of World (%) Source: IMF.215.Direction of Trade Statistics ( ). 15

16 Figure 3.3 Trend of Korea s Import (CIF) Unit: million USD(left), %(right) 6, 5, 4, 3, 2, 1, Korea (million USD) 16, , , , , ,514 Share of World (%) Source: IMF.215.Direction of Trade Statistics ( ). As for Korea s top trading partners, China has become Korea s most significant export and import partner in 214 accounting for a share of 25.4% and 17.1% in Korea s total exports and imports, respectfully. Japan was the third largest export destination and the second largest import source. In particular, Russia s position in Korea s trade increased significantly since 2 ranking as the 12 th largest export destination in 214. Its share increased from.46% and 1.28% in 2 to 1.77% and 2.98% in 214 in export and import, respectfully. Table 3.1 Top Export Partners of Korea USA China China China China China 2 Japan USA USA USA USA USA 3 China Japan Japan Japan Japan Japan 4 Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong Hong Kong 5 Taiwan Singapore Singapore Singapore Singapore Singapore 6 Singapore Taiwan Taiwan Vietnam Vietnam Vietnam 7 UK India Indonesia Taiwan Taiwan Taiwan 8 Germany Germany Vietnam Indonesia Indonesia India 9 Malaysia Vietnam India India India Indonesia 1 Indonesia Indonesia Brazil Russia Russia Mexico Source: IMF.215.Direction of Trade Statistics. 16

17 Table 3.2 Top Import Partners of Korea Japan China China China China China 2 USA Japan Japan Japan Japan Japan 3 China USA USA USA USA USA 4 Saudi Arabia Saudi Arabia Saudi Arabia Saudi Arabia Saudi Arabia Saudi Arabia 5 Australia Australia Australia Qatar Qatar Qatar 6 Indonesia Germany Qatar Australia Australia Germany 7 Malaysia Indonesia Indonesia Kuwait Germany Australia 8 UAE Taiwan Germany Germany Kuwait Kuwait 9 Taiwan UAE Kuwait Indonesia UAE UAE 1 Germany Qatar UAE UAE Taiwan Taiwan Source: IMF.215.Direction of Trade Statistics. As for Korea s trade structure, there were no significant changes in the top ranking export and import products. In 2, Korea s top three major export items were machinery and transport equipment, manufactured goods classified chiefly by material and chemicals and related products, and this remained the same in 214. This reflects Korea s global stance as leading shipbuilders and manufacturers of electronics. In terms of Korea s import structure, the top three major items were mineral fuels, lubricants and related materials, which partly include the industrial raw materials, machinery and transport equipment and manufactured goods. Under the dynamic changes in global trade regulations, Korea adopted the new trade roadmap in 213, aiming to become a linchpin in regional economic integration. In this aspect, Korea has participated proactively in economic integration in the Asia-Pacific region. Within the Greater Tumen Region countries, Korea-China FTA came into effect in December 215, and China-Japan-Korea FTA along with the RCEP started the negotiations, although little progress has been made, since

18 Figure 3.4 Trend of Korea s Export to GTR countries unit: % Source: IMF.215.Direction of Trade Statistics ( ). Figure 3.5 Trend of Korea s Import to GTR countries unit: % Source: IMF.215.Direction of Trade Statistics ( ). 18

19 Figure 3.6 Export Structure of Korea unit: % 2 1% % 1% 1% 6% % 214 1% % 7% 8% 9% % 1% 9% % 58% 18% 55% 12% 13% Note: Commodities of SITC, Rev.3 Source: United Nations Commodity Trade Statistics Database (UN Comtrade). ( ) 19

20 Figure 3.7 Import Structure of Korea unit: % 2 4% 214 5% 1% % % % 6% 7% 8% 8% 37% 24% 27% 33% 11% 9% % 11% 9% % Note: Commodities of SITC, Rev.3 Source: United Nations Commodity Trade Statistics Database (UN Comtrade). ( ) 3.3 Foreign Direct Investment Compared with trade, Korea s share in the world s total investment are much smaller. Korea s outward FDI flow has increased remarkably from 2 to 214. While its recent FDI remained almost constant, Korea s outward FDI share to the world accounted for 2.26% in 214 from.42% in 2. The top three destinations of Korea s outward flows in 214 were the United States, China and Vietnam (The Export-Import Bank of Korea). Nonmanufacturing sectors had the largest share in Korea s outward FDI representing 63.4% in 214. Manufacturing sectors represented 24.5% of Korea s total outward FDI, mainly in the 2

21 electrical machinery and equipment, and transport equipment. The mining sector represented 11.8% in 214. Meanwhile, Korea s inward FDI fluctuated, but its share of world inward FDI flows remained constant from.84% share of world inward FDI in 2 to.81% share in 214. Figure 3.8 Trend of Korea s Outward FDI Unit: million USD(left), %(right) Source: United Nations Conference on Trade and Development Statistics Database (UNCTAD). ( ) Figure 3.9 Trend of Korea s Inward FDI Unit: million USD(left), %(right) Source: United Nations Conference on Trade and Development Statistics Database (UNCTAD). ( ) 21

22 3.4 Regional Level Statistics of Republic of KOREA Korea is consisted of nine provinces and eight Cities, and two provinces namely Gyeongsangbuk and Gangwon and two cities namely Busan and Ulsan are the official participants of the GTI. Korean GTR accounted for 18.64% of Korea s total GDP in 214 and the share has been constant at around 18% in recent years. The region recorded a lower level of growth rate in general compared to that of Korea s total GDP growth rate. The share of the region s export to GTI countries has slightly increased since 2 from 25.53% to 27.32% in 214 while import decreased during the same period from 31.96% to 22.33%. In particular, the region s export and import to China and Russia increased from 2 to 214. Russia s share of export and import, for instance increased from.41%(export) and 1.99%(import) to 1.39% and 6.2%, respectfully. Figure 3.1 Trend of Korea GTRs GRDP Source: Table 3.3 Korea GTR s GDP Growth Rate GRDP Korea Source: 22

23 Figure 3.11 Trend of Korean GTRs Export to GTR countries unit: % DPRK(%) China(%) Japan(%) Mongolia(%) Russia(%) Others(%) Source: Korea International Trade Association Database (KITA). ( ) Figure 3.12 Trend of Korean GTRs Import to GTR countries unit: % DPRK(%) China(%) Japan(%) Mongolia(%) Russia(%) Others(%) Source: Korea International Trade Association Database (KITA). ( ) 23

24 4. China 4.1 Economic Overview China is now the world s largest economy accounting for 16.6% of the world economy in terms of real GDP (PPP, current international $, World Bank) growing from 7.7% of world GDP in 2. However, China s remarkable growth in the 2s started to slowdown afterwards, entering to a new normal phase of growth while attempting to rebalance the economy to embrace a more sustainable economic growth. China s economic growth in most recent years is moderated to around 7% compared to a 1% average growth during the 2s. In response to the slowdown of the economy, the Chinese government started to focus on economic restructuring. The structural reform aims to drive the Chinese economy towards to a more sustainable development and to grow beyond the middle-income trap. The government is rebalancing its growth model from growth driven by trade and investment towards to domestic consumption including services. It is because the manufacturing sector, which was the former pillar of its economic growth, currently faces overcapacity problems. China is now pushing the service sector, consumption and private entrepreneurship as new drivers of economic growth, relying less on debt and more on the stock market funding. The service sector has become an increasingly important part of the Chinese economy. The service sector accounts for 48.2% of Chinese GDP in 214, increased by 1.3%p compared to 213, while manufacturing sector accounts for 3.8% of GDP in 213, decreased by.2%p compared to 213(World Bank). While experiencing rapid economic growth, there has also been a significant rise of regional inequality in the Chinese economy. According to the National Bureau of Statistics in 24

25 214, the average GDP per capita for the top 3 provincial-level-regions (Tianjin, Beijing, Shanghai) is 1,865 RMB, while that of the bottom 3 (Gansu, Guizhou, Yunnan) is only 26,711 RMB. The average GDP per capita of GTR provinces is 56,48 RMB in 214. That is, the economic condition of GTR provinces is better than those of western provinces, but it still lag behind those of urban provinces. As an attempt to resolve the regional imbalance problem, China has released regional revival polices for provinces that lag behind China s average growth. One of the policies China has adopted was the Revitalize Northeast China policy to rejuvenate the industrial base in the Northeast region of China. The program aims to revive the traditional industry, to implement structural reforms of the SOEs, to construct an environment-friendly economy, and to reinforce regional cooperation with Russia, Mongolia and the two Koreas. The program includes the three Northern provinces (Heilongjiang, Liaoning, Jilin) and five eastern prefectures of Inner Mongolia in the GTR. Figure 4.1 Trend of China s GDP and GDP growth 6,, 5,, 4,, 3,, 2,, 1,, Unit: million USD(left), %(right) Real GDP (million USD) 1,435,959 3,89,879 4,252,73 4,578,168 4,93,687 5,295,558 GDP Growth (%) Source: United Nations Conference on Trade and Development Statistics Database (UNCTAD). ( ) 25

26 4.2 Trade China is the world s largest trading country followed by the US leading the world in exports and coming in second for imports. China is rapidly becoming the most important trade partner for many countries. In 214, the volume of China s export amounts 2,343 billion dollars with a 13% share of the world export, increasing from 249 billion dollars which only accounts for a 4% share of the world in 2. Meanwhile, the volume of China s import is 1,963 billion dollars with an 11% share of the world import, while it was 225 billion dollars, only accounting for a 3.5% share of the world import in 2. The increase of Chinese trade attributes to many factors, such as China s accession to the WTO in 21, its favorable policy on processing trade and signing a number of FTAs with its trade partners. Korea-China FTA will also take effect on 2 December, 215. China is transferring its source of growth from an export-driven to a domestic consumption-driven economy to alleviate regional imbalance and income inequality, and lower its high dependence of export. Therefore, the growth of its export is expected to moderate gradually from now on, relative to domestic consumption. 26

27 Figure 4.2 Trend of China s Export (FOB) Unit: million USD(left), %(right) 2,5, 2,, 1,5, 1,, 5, China (million USD) 249,212 1,578,444 1,899,28 2,5,92 2,21,661 2,343,221 Share of World (%) Source: IMF.215.Direction of Trade Statistics ( ). Figure 4.3 Trend of China s Import (CIF) Unit: million USD(left), %(right) 2,5, 2,, 1,5, 1,, 5, China (million USD) 225,175 1,393,99 1,741,43 1,817,344 1,949,3 1,963,15 Share of World (%) Source: IMF.215.Direction of Trade Statistics ( ). The top five destinations for exports of China were the US, Hongkong SAR, Japan, Korea and Germany, while the top five import partners of China were Korea, Japan, USA, Taiwan and Germany. This list of top export partners was virtually unchanged during 2s. 27

28 Table 4.4 Top Export Partners of China USA USA USA USA Hong Kong USA 2 Hong Kong Hong Kong Hong Kong Hong Kong USA Hong Kong 3 Japan Japan Japan Japan Japan Japan 4 Korea Korea Korea Korea Korea Korea 5 Germany Germany Germany Germany Germany Germany 6 Netherlands Netherlands Netherlands Netherlands Netherlands Netherlands 7 UK India India India UK Vietnam 8 Singapore UK UK UK Russia UK 9 Taiwan Singapore Russia Russia Vietnam India 1 Italy Italy singapore singapore India Russia Source: IMF.215.Direction of Trade Statistics ( ). Table 4.4 Top Import Partners of China Japan Japan Japan Japan Korea Korea 2 Taiwan Korea Korea Korea Japan Japan 3 Korea Taiwan Taiwan Taiwan Taiwan USA 4 USA USA USA USA USA Taiwan 5 Germany Germany Germany Germany Germany Germany 6 Hong Kong Australia Australia Australia Australia Australia 7 Russia Malaysia Malaysia Malaysia Malaysia Malaysia 8 Malaysia Brazil Brazil Saudi Arabia Brazil Brazil 9 Austrailia Thailand Saudi Arabia Brazil Saudi Arabia Saudi Arabia 1 Singapore Saudi Arabia Russia South Africa South Africa South Africa Source: IMF.215.Direction of Trade Statistics ( ). 28

29 Among GTI members, Japan and Korea is included in the top five trade partner. In terms of export, Japan and Korea account for 6.4%, 4.3% of China s total exports in 214 respectively. Russia accounts for a smaller share (2.3%) compared to those countries, while Mongolia has never been included in the top 1 trade partners with only.1% share of Chinese export. The share of China s import to GTI member countries is similar to export. Japan and Korea account for 8.3%, 9.7% in 214 respectively. Russia and Mongolia account for 2%,.3% respectively in 214. It is worth to note that the share of Japan in China s trade has been decreasing about 1%p both in import and export, but Japan still remains as an important trade partner to China. Figure 4.4 Trend of China s Export to GTR countries unit: % DPRK (%) Japan (%) Korea (%) Mongolia (%) Russia (%) Source: IMF.215.Direction of Trade Statistics ( ). 29

30 Figure 4.5 Trend of China s Import to GTR countries unit: % DPRK (%) Japan (%) Korea (%) Mongolia (%) Russia (%) Source: IMF.215.Direction of Trade Statistics ( ). As for China s trade structure, there were no significant changes in the top ranking export products. In 214, China s top three exports are machinery and transport equipment (46%), crude materials, inedible, except fuels (26%), manufactured goods classified chiefly by material (17%), same with that of 2(33%, 35%, 17% for each). The share of exports of Machinery and transport equipment has been increased by 13%p implying that China is becoming to be more specialized in the industry. On the other hand, the import structure has changed slightly. In 2, the top three products of imports were machinery and transport equipment (41%), manufactured goods classified chiefly by material (19%) and Chemicals and related products (13%). However, the top three importing products has become machinery and transport equipment (37%), mineral fuels, lubricants and related materials (16%), Chemicals and related products (1%) in 214 where the change was mainly driven by the increasing importance of mineral fuels, lubricants and related materials imports. 3

31 Figure 4.6 Export Structure of China 2 % 5% % 2% 3% % 214 % Unit: million USD(left), %(right) 3% % 1% 1% % 6% 35% 5% 26% 17% 17% 33% 46% Note: Commodities of SITC, Rev.3 Source: United Nations Commodity Trade Statistics Database (UN Comtrade). ( ) 31

32 Figure 4.7 Import Structure of China(214) unit: % 2 1% 6% 2% % 9% 214 7% 4% 2% % 14% 9% % 41% 13% 37% 1% 16% 19% 9% 1% Note: Commodities of SITC, Rev.3 Source: United Nations Commodity Trade Statistics Database (UN Comtrade). ( ) 4.3 Foreign Direct Investment In 214, China s outward FDI is 116, million dollars having 8.57% share of world FDI, while it was 916 million dollars having only.8% share of world FDI in 2. It has enormously increased during The stable FDI level and rapid growth shows that the country is still an attractive destination for foreign investments. China s destinations of investment has been changing from resource-rich developing countries to developed countries that provide access to advanced technologies, established brands, extensive industry 32

33 experience and worldwide distribution networks. 3 In 214, China s Inward FDI is 128,5 million dollars having 1.46% share of world FDI, while it was 4,715 million dollars having only 2.99% share of world FDI in 2. It has been significantly increased during 2-214, same with China s outward FDI. The most significant development in the FDI arena in the past few years is the growth in FDI in the service sector. In 214, services attracted 66.2 billion dollars in FDI, up 7.8 percent yearon-year. 4 The service sector now takes a greater share of FDI than the manufacturing sector. Figure 4.8 Trend of China s Outward FDI Unit: million USD(left), %(right) 14, 12, 1, 8, 6, 4, 2, China (million USD) ,811 74,654 87,84 11, 116, Share of World (%) Source: United Nations Conference on Trade and Development Statistics Database (UNCTAD). ( ) Ibid,. 33

34 Figure 4.9 Trend of China s Inward FDI Unit: million USD(left), %(right) 14, 12, 1, 8, 6, 4, 2, China (million USD) 4, , , ,8 123, ,5 Share of World (%) Source: United Nations Conference on Trade and Development Statistics Database (UNCTAD). ( ) 4.4 Regional Level Statistics of China China consists of 23 provinces including Taiwan, 4 municipalities (Beijing, Tianjin, Shanghai, Chongqing), 5 autonomous regions (Xinjiang, Tibet, Inner Mongolia, Guangxi and Ningxia) and 2 special administrative regions (Hong Kong and Macau). Among them, GTR includes three Northeast provinces (Liaoning, Jilin and Heilongjiang and Inner Mongolia). In 23, as the Chinese government made revitalizing the northeast a priority, its economic output increased about 4 times during Despite the government s effort, the share of GRDP of the four provinces of GTR, however, has not changed much. The GRDP of the four provinces is 7,524 billion RMB in 214, accounting approximately 11% share of China s total GDP. Out of the 31 provincial-level-region, Liaoning is the only GTR province included in the top 1 provincial-level-regions in terms of GRDP in 214, while Inner Mongolia, Heilongjiang and Jilin ranked 15 th, 2 th, 22 nd respectively. 34

35 Figure 4.1 Trend of Northeast provinces and Inner Mongolia s GRDP Unit: billion USD(left), %(right) 8, 7, 6, 5, 4, 3, 2, 1, GRDP (billion RMB) 1,131 4,917 5,974 6,636 7,135 7,524 Share of China (%) Source: China National Bureau of Statistics; CEIC database. ( ) As for the Chinese GTR provinces export and import to other GTI member countries, the export share showed a decreasing trend; from 52.1% in 2 to 38.8% in 214. The import share has decreased more significantly from 52.14% to 33.14% during the same period. The decline is mainly due to the decreasing share of the trade between GTR provinces and Japan. Among the GTR provinces, Liaoning s trade makes up 45% of the inter-regional trade implying that trade costs are higher for other inland provinces. The total volume of the trade between GTI member countries is 32,47million dollars in Liaoning, 22,842 million dollars in Heilongjiang, 8,185 million dollars in Jilin and 7,938 million dollars in Inner Mongolia (including DPRK). 35

36 Figure 4.11 Trend of Northeast provinces and Inner Mongolia s Export to GTR countries unit: % DPRK(%) Japan(%) Korea(%) Mongolia(%) Russia(%) Others(%) Source: Korea International Trade Association Database (KITA). ( ) Figure 4.12 Trend of Northeast provinces and Inner Mongolia s import to GTR countries unit: % DPRK(%) Japan(%) Korea(%) Mongolia(%) Russia(%) Others(%) Source: Korea International Trade Association Database (KITA). ( ) 36

37 5. Russian Federation 5.1 Economic Overview The Russian Federation, the largest country on earth with a population of 143 miliion (214, UNCTAD), has been gradually enlarging its economy since the collapse of the Soviet Union, driven by natural resources such as oil and gas. Although it suffered from economic transition in the early 199 s, high oil prices and Vladimir Putin s major economic reforms led fine economic growth in the following years. However, high dependence on oil and gas - the country relies heavily upon oil and gas, which forms one-fifth of the total GDP, two-thirds of export volume, and half of public revenue (214) made Russia highly vulnerable to global crisis. The financial crisis in 29 deeply affected Russia decreasing GDP by 7.8 percent as a result of plunge in export and domestic demand. Nevertheless, shortly after the crisis, Russia became one of the top 1 largest economies in the world in 211. Meanwhile, economic growth started to slowdown since 212 as low global energy prices and depreciation of the ruble caused decline of investment and lower productivity. The bureaucratic and inefficient system, energy dependent economic structure, low investment and low labor productivity are major structural vulnerabilities that hinder potential growth power of the Russian Federation. The fraction of investment in Russia shows 23 percent, which falls short of other emerging countries (3% in average, China 4%). Furthermore, the annexation of Crimea by the Russian Federation in March 214, which was followed by international sanctions from the United States and the European Union, has negatively affected the country s economy in trade and investment. Russia, which used to be in intimate relations with the European countries half of trade and 7 percent of inward FDI comes from European Union, is undergoing even more intensified economic slowdown. Russia s import restrictions on food from Canada, Australia, EU, Norway and the US which started from August 214 contributed to 37

38 the deteriorating economy in the second-half of 214. Ban of import on food increased domestic agricultural prices which led to consumption decrease, as it overlapped with ruble depreciation and plunging oil prices. Consequentially, Russia s economic growth rate slowed to.6 percent, which is a decrease by half of the previous year. According to the UN statistics, real GDP and GDP per capita of 214 are estimated billion USD and 7,16 USD each. Figure 5.1 Trend of Russia s GDP and GDP growth Unit: million USD(left), %(right) 1,2, 1,, 8, 6, 4, 2, * Real GDP (million USD) 567,392 99, ,38 98,69 993,54 999,51 GDP growth (%) Note: *estimated. GDP in constant (25) prices Source: UNCTAD ( ). 5.2 Trade Overall volumes of trade has been decreasing since the end of 214 due to the oil price shock, collapse of the Russian ruble, and the Western sanctions against Russia over Ukraine crisis. Export fell by 16.5 percent year-on-year in 214 4Q, while import also dropped by 2 percent. The downtrend of export and import will continue in 215, followed by a weak recovery in 216 and

39 Figure 5.2 Trend of Russia s Export (FOB) Unit: million USD(left), %(right) 6, 5, 4, 3, 2, 1, Russia (million USD) 13,2 373, , , , ,615 Share of World (%) Source: IMF ( ) Figure 5.3 Trend of Russia s Import (CIF) 35, 3, 25, 2, 15, 1, 5, Unit: million USD(left), %(right) Russia (million USD) 33, , , ,85 314, ,844 Share of World (%) Source: IMF ( ) According to statistics in 214, most of Russia s major export partners are European countries, such as Netherlands (13.39%), Italy (5.82%), Germany (5.1%), and Northeast Asian countries such as China (7.54%) and Japan (3.99%). China is Russia s biggest import partner which takes percent of Russia s import volume, followed by Germany (11.49%), USA (6.49%), Italy (4.42%) and Belarus(4.3%). 39

40 Table 5.1 Top Export Partners of Russia Germany Netherlands Netherlands Netherlands Netherlands Netherlands 2 USA Italy China China Italy China 3 Italy China Italy Germany Germany Germany 4 Belarus Germany Germany Italy China Italy 5 China Poland Poland Turkey Turkey Turkey 6 Ukraine Turkey Ukraine Ukraine Ukraine Japan 7 UK Ukraine USA Belarus Belarus Belarus 8 Poland Japan Turkey Poland Japan Korea 9 Netherlands USA Japan Kazakhstan Poland Ukraine 1 Switzerland Finland Korea Japan Kazakhstan Poland Source: IMF.215.Direction of Trade Statistics ( ) Table 5.2 Top Import Partners of Russia Germany China China China China China 2 Belarus Germany Germany Germany Germany Germany 3 Ukraine Ukraine Ukraine Ukraine USA Ukraine 4 USA Japan Italy Japan Ukraine Japan 5 Kazakhstan Italy USA USA Italy Italy 6 Italy USA France France Belarus USA 7 France France Korea Italy Japan France 8 Finland Korea Belarus Belarus France Korea 9 China Poland Japan Korea Korea Poland 1 UK Turkey Poland Kazakhstan Poland Turkey Source: IMF.215.Direction of Trade Statistics ( ) 4

41 Figure 5.4 Trend of Russia s Export to GTR countries unit: % China (%) DPRK (%) Japan (%) Korea (%) Mongolia (%) Source: IMF.215.Direction of Trade Statistics ( ) Figure 5.5 Trend of Russia s Import to GTR countries unit: % China (%) DPRK (%) Japan (%) Korea (%) Mongolia (%) Source: IMF.215.Direction of Trade Statistics ( ) 41

42 The largest contributor of Russian exports in 214 was mineral fuels, lubricants and related materials which took percent. Rapid drop of oil price at the end of 214 naturally caused economic aggravation of the energy dependent country. The price of Ural crude oil, which is one of Russia s main exports, had dropped from approximately 11 USD per barrel to 52.8 dollars by 215 1Q. The price has been increased since then, but not far above 6 dollars per barrel. Russia s imports in 214 were largely composed of machinery and transport equipment (44.33%), chemicals and related products (13.3%), manufactured goods (12.61%), miscellaneous manufactured articles (12.3%), food and live animals (1.99%), etc. Import on the first half of 215 decreased by 38.6 percent year-on-year, as the country s economic uncertainty brought shrinkage of domestic investment sentiment, which consequently led to a decrease of demand on machinery equipments. Figure 5.6 Export Structure of Russia unit: % 2 6% 12% 2% 1% % 4% 214 1% 4% 11% 5% 3% 3% % 3% 18% % 6% % 51% 7% Source: United Nations Commodity Trade Statistics Database (UN Comtrade). ( ) Note: Commodities of SITC, Rev.3 42

43 Figure 5.7 Import Structure of Russia unit: % 2 7% 11% 16% 3% % % 11% 2% 3% 1% 1% 7% 13% 25% 4% 1% 12% 44% 13% 14% Source: United Nations Commodity Trade Statistics Database (UN Comtrade). ( ) Note: Commodities of SITC, Rev Foreign Direct Investment Russia used to be one of the world top 5 countries in inward and outward foreign direct investment before the 214 crisis. Inflows and outflows each amounted to 69 billion and 87 billion USD in 213. But inward FDI includes large proportion of round-tripped capital, therefore making the real size of FDI a lot smaller. Regardless of the abundant natural resources and solid FDI regime, delay of modernization and diversification of the resource-dependent economy, weak infrastructure and corruption have been the major reasons for lack of foreign investment. Furthermore, the newest Russian crisis brought a rapid decline in both inward and outward FDI as the western sanctions expanded the banking sector, making it more difficult for financing. 43

44 Overseas investment by Russia has decreased to 56 billion USD, a 34.8 percent drop from 213. The decline outstands even more while foreign direct investment from emerging economies, especially China, boomed during the same time period. Meanwhile, inward foreign direct investment declined even more, by 69.3 percent, from 69 billion USD in 213 to 21 billion USD in 214. Outflows of investment surpassed inflows by 743 million USD in 214 Q3, and 1 billion USD in Q4. Such weaker investment is mostly due to the worsening economic conditions in Russia: continuation of Western sanctions; sharp falls in oil prices and collapse of the ruble. In such circumstances, foreign partners are showing doubts about Russia s large-scale projects, and many companies have started cancelling their investments to Russia. Figure 5.8 Trend of Russia s Outward FDI Unit: million USD(left), %(right) 1, 7 8, 6, , 2, Russia (million USD) 3,177 52,616 66,851 48,822 86,57 56,438 Share of World (%) Note: Asset/liability basis from 21 Source: UNCTAD ( ) 44

45 Figure 5.9 Trend of Russia s Inward FDI Unit: million USD(left), %(right) 8, 7, 6, 5, 4, 3, 2, 1, Russia (million USD) 2,714 43,168 55,84 5,588 69,219 2,958 Share of World (%) Note: Asset/liability basis from 21 Source: UNCTAD ( ) 5.4 Russian Far East Economy Far Eastern District of Russian Federation occupies 6,169,3km 2 which accounts for 36 percent of the total land area (17,98,2 km 2 ). Population of the district by January 215 is 6,211 thousand 5, making population density lowest of all other districts, 1 person per km 2. The district shows rather poor level of GRDP (gross regional domestic product), which was 2,88 billion rubles in 213, accounting for only 5.2 percent of the country. The district has been relatively underdeveloped due to far distance from the central federal district, harsh climate, and stagnant economic structure which has been highly focused in production of raw 5 Численность населения Российской Федерации по муниципальным образованиям, на 1 января 215 года, 6fce ( ) 45

46 materials and war industry since the days of the former Soviet Union. 6 Such circumstances have hindered the development of economic and social infrastructure, which naturally led to drop of population and domestic demand. In attempts to find solutions, the country has pushed forward a scheme of development of the Far Eastern District, but due to delays of qualitative innovation of industrial structure, almost no visible changes were made since 2. Figure 5.1 GRDP of Far Eastern Federal District Unit: million USD(left), %(right) 3, 5.8 2,5 2, 1,5 1, GRDP (billion rubles) 39 2,111 2,533 2,72 2,88 Share of Russia (%) Source: Федеральная служба государственной статистики, Национальные счета, ( ) Recently, the Far Eastern District has come into spotlight in terms of development of gas processing industry, production of natural resources and increase of demand for related infrastructure. Chayandinskoye in Saha Republic, which is the district s major gas field planned to be completed by 218, is expected to produce natural gas to fulfill the demand of 6 KIEP, 214, Sung Hoon Jeh, et al., Russia s Development of the Far East and the Baikal Region and Korea s Countermeasures, p

47 China through pipelines Power of Siberia and Eastern Route. Meanwhile, there are concerns over expansion of raw material production rather than processed production. The portion of mining industry has increased by 11.6 percent point, from 14.9 percent in 25 to 26.5 percent in 213. Shares of manufacturing (5.4%, 2.3%p), construction (6.8%, 2.5%p), transportation and communication service (13.3%, 1.9%p) has decreased compared to 25. Based on economic cooperation among neighboring countries, trade volume shows rapid increase during the last five years. Total trade volume increased by 49.1 percent in 214 (38,98 million USD) compared to 21 (18,52 million USD). Export increased by 54 percent from 18,52 million USD to 28,491 million USD, while import increased by 37.4 percent from 7,634 million USD to 1,489 million USD. Figure 5.11 Export of Far Eastern Federal District to GTR (21-214) unit: % China (%) DPRK (%) Japan (%) Korea (%) Mongolia (%) Source: Дальневосточное таможенное управление, Статистика внешней торговли, ( ) 47

48 Figure 5.12 Import of Far Eastern Federal District to GTR (21-214) unit: % China (%) DPRK (%) Japan (%) Korea (%) Mongolia (%) Source: Дальневосточное таможенное управление, Статистика внешней торговли, ( ) According to 214 statistics, countries of GTR (Greater Tumen Region) - Japan, Republic of Korea and China - are the major trading partners. Republic of Korea is the District s biggest export partner which holds percent, followed by Japan (29.71%) and China (19.2%). Major import partners are China (45.2%), Japan (16.91%), Republic of Korea (1.62%) and the United States (5.9%). In short, the District s recent trade (total 78.65%, export 8.9%, import 72.56%) is mostly concentrated in GTR, especially in Japan, Republic of Korea and China. Foreign direct investment towards the District had shown high level of increase in 211 and 212, resulting from large investment from major investors, inter alia Netherlands, towards the mining sector in Saha Republic. In 211, FDI increased to more than 2.7 times 3,199 million USD with 9 percent of foreign investment concentrated in fuel and energy 48

49 production - of which Netherlands took the lead (1,5 million USD, 47.7% of total FDI) followed by Cyprus (699 million USD, 21.93%) and India (574 million USD, 18.2%). In 213, total volume of FDI amounted to 2,41 million USD and major foreign investors were Japan (913 million USD, 37.89%), Germany (18.25%), India(19.17%) and Cyprus(9.5%). 49

50 6. Mongolia 6.1 Economic Overview Mongolia has successfully transformed into a market-based economy and multiparty democracy after the collapse of the Soviet Union in 199. Although the country experienced a sharp drop in GDP at the initial stage, economic growth showed gradual increase during the last 2 years, which was driven by vast quantities of mineral resources. Mineral resources take upon 2 percent of GDP and 88 percent of export, and more than 7 percent of foreign direct investment flows into the mineral sector. Mongolia s main economic partners are China and Russia, with China growing its influence. Amidst China s increasing demand on natural resources and higher level of global commodity prices, Mongolia s GDP growth had reached its peak of 17.5 percent in 211, as major strategic mining projects attracted higher levels of foreign investment. However, the country with 2.9 million population (214, UNCTAD) is recently going through tough circumstances. The fears of plundering of resources brought excessive political interference into the market-economy, resulting insecure regulatory environment for foreign investors. Cancelations and suspensions of projects led to sharp drop of FDI, followed by slowdown of GDP growth to 7.8 percent in 214. According to the national statistical office of Mongolia, GDP growth of first three quarters in 215 dropped to 2.5 percent. China s slowdown of growth and decreasing demand on natural resources also added to poor economic growth. According to the UN statistics, real GDP and GDP per capita of 214 are estimated 5.6 billion USD and 1,943 USD each. 5

51 Figure 6.1 Trend of Mongolia s GDP and GDP growth Unit: million USD(left), %(right) 6, 5, 4, 3, 2, 1, * Real GDP (million USD) 1,843 3,454 4,59 4,562 5,98 5,597 GDP growth (%) Note: *estimated. National Statistical office of Mongolia estimates 7.8 percent of GDP growth in 214. GDP in constant (25) prices Source: UNCTAD ( ) Although Oyu Tologoi project has been normalized in May 215 due to Mr.Saikhanbileg government s concentrated effort, the country will need more time to get the national economy back on track, due to lack of investment in the previous years and remaining uncertainties of major mining projects in the midst of consistent political disputes. Meanwhile, the possibility of default crisis still exists as the external debt repayment schedule approaches in early 215 the Mongolian government had requested talks about possible support package from IMF. 6.2 Trade Mongolia s trade with China has rapidly increased during the last few years, which made China Mongolia s largest percent of total export partners in 214 trade partner. Overdependence on mineral revenues and demand from China is making Mongolia vulnerable to global circumstances such as China s slowdown of growth, decline in global commodity prices, etc. Export volume has surged by percent in 214 (4.85 billion USD) amid descending 51

52 commodity prices, due to increased amount of mineral export earnings from Oyu Tolgoi mine. Adding to decreasing commodity prices, recent trend of decreasing global demand for coal and copper and China s economic slowdown is threatening Mongolia s future export revenue. In the meanwhile, due to lower levels of mining investment, imports fell by percent compared to the previous year. Figure 6.2 Trend of Mongolia s Export (FOB) Unit: million USD(left), %(right) 6,.3 5, 4,.2 3, 2,.1 1, Mongolia (million USD) 536 2,83 3,882 4,25 3,515 4,835 Share of World (%) Source: IMF ( ) Figure 6.3 Trend of Mongolia s Import (CIF) Unit: million USD(left), %(right) 9, 8, 7, 6, 5, 4, 3, 2, 1, Mongolia (million USD) 614 3,822 6,956 7,816 6,897 5,88 Share of World (%) Source: IMF ( ) 52

53 Table 6.1 Top Export Partners of Mongolia China China China China China China 2 USA Canada Canada Canada Canada Italy 3 Russia Russia Russia Russia Italy Russia 4 UK UK Korea Korea Russia Korea 5 Italy Italy Italy Italy Korea Indonesia 6 Australia Korea India USA USA Japan 7 Korea Japan Japan Japan Japan UK 8 Japan USA UK UK Germany USA 9 Hong Kong Ukraine USA India UK Germany 1 Switzerland Germany Germany Germany India Belgium Source: IMF.215.Direction of Trade Statistics ( ) Table 6.2 Top Import Partners of Mongolia Russia China China China China China 2 China Russia Russia Russia Russia Russia 3 Japan Korea Korea USA Korea Korea 4 Korea Japan Japan Korea Japan Japan 5 Germany USA USA Japan USA USA 6 USA Germany Germany Germany Germany Germany 7 Hong Kong Singapore Canada Belarus Belarus Singapore 8 Singapore France Singapore Canada Singapore Kazakhstan 9 France Ukraine Belarus Singapore Kazakhstan Poland 1 Kazakhstan Poland France Kazakhstan Poland Italy Source: IMF.215.Direction of Trade Statistics ( ) 53

54 Figure 6.4 Trend of Mongolia s Export to GTR countries unit: % China (%) DPRK (%) Japan (%) Korea (%) Russia (%) Source: IMF.215.Direction of Trade Statistics ( ) Figure 6.5 Trend of Mongolia s Import to GTR countries unit: % China (%) DPRK (%) Japan (%) Korea (%) Russia (%) Source: IMF.215.Direction of Trade Statistics ( ) 54

55 The largest contributor of Mongolia s exports in 214 was crude materials, inedible, mineral fuels, lubricants and related materials which occupied 88.9 percent. In the same year, imports were largely composed of machinery and transport equipment (31.28%), mineral fuels, lubricants and related materials (26.44%), and manufactured goods (19.51%), etc. Mongolia saw import volume of machinery and transport fall by percent compared to 213, with sharply reduced investment for mining sector. Figure 6.6 Export Structure of Mongolia unit: % % 23% 1% 4% % 1% % % 1% 7% % % % 2% % 26% % 1% 69% 63% Source: United Nations Commodity Trade Statistics Database (UN Comtrade). ( ) Note: Commodities of SITC, Rev.3 55

56 Figure 6.7 Import Structure of Mongolia unit: % % % 12% 6% % 6% 2% 1% 4% 33% 1% 31% 26% 19% 17% 5% 1% 2% 7% 1% Source: United Nations Commodity Trade Statistics Database (UN Comtrade). ( ) Note: Commodities of SITC, Rev Foreign Direct Investment Mongolia had had attracted 4.72 billion dollars in 211 and 4.45 billion dollars in 212, which mostly flowed into the mining sector. This increased national concerns about foreign firms encroaching on Mongolian underground resources. Accordingly, from 29 to 212, many legislation were made to prevent foreign firms from obtaining majority shares in mining sectors, and the Oyu Tolgoi project has ceased for the last two years due to dispute with the Mongolian government. Such insecure 56

57 regulatory environment resulted to a rapid drop of foreign direct investment to Mongolia, 2.14 billion dollars in 213 and 58 million dollars in 214. Figure 6.8 Trend of Mongolia s Outward FDI Unit: million USD(left), %(right) Mongolia (million USD) Share of World (%) Source: UNCTAD ( ) Figure 6.9 Trend of Mongolia s Inward FDI Unit: million USD(left), %(right) 5, 4, 3, 2, 1, Mongolia (million USD) 54 1,691 4,715 4,452 2,14 58 Share of World (%) Source: UNCTAD ( ) As Mongolian economy started to be negatively influenced by lower level of investment inflows, the government started amending legislations from 213, in order to attract higher foreign direct investment by mitigating existing regulations. The Foreign Investment Law which has been amended 57

58 in 214 protects investors authority to maintain initial conditions which provides relief from the country s unstable regulatory environment. The Law of Mongolia on Amending the Minerals Law (Amendment Law to the Minerals Law of 26) has also become effective in the same year, which expanded the area of mineral exploration from 8 percent to 2 percent, extended exploration period from 9 years to 12 years along with resuming special permissions to explore new minerals. The Amendment also limits the government intervention in mineral sector by creating new government agency the National Geological Office and a policy council mandated to implement state policy in relation to the mineral sector. Meanwhile, further amendments were made to the Minerals Law in February 215 as it enabled the option to replace state share with royalty. On 14 May 215, as the Law on Amendment to the Investment Law come into effect, all the authorities which were provided to the former Ministry of Economic Development has been devolved upon the Prime Minister. Mr.Saikhanbileg s new government the Government for Solution - which was established on December 214 to normalize Mongolian economy has signed a deal with Rio Tinto to launch the second phase of the country s largest mine, Oyu Tolgoi. Yet, the regulatory environment seems to remain volatile for the next few years which will hinder active investment into the country. Tavan Tolgoi the world s largest coal mine along with Oyu Tolgoi project negotiation is struggling with the recent collapse of the coalition government. 58

59 7. Japan 7.1 Economic Overview Japan, a country with a population of million, is the third largest economy in the world with US$ 4,61 nominal GDP. The country also recorded US$ 4,765billion real GDP in 214 which is a.3% decrease from 213, and its GDP per capita recorded US$ 36,116 (US$ 36,426 in terms of PPP, current international $, UNCTAD). Japan s manufacturing sector serves as a key element of Japan s economy. The country also listed 218 companies at the Forbes global 2 in 215 which is the world s third largest. In the late 2s, before the impact of the global financial crisis, Japan s economic recovery trend was largely driven by its strong net exports, which accounted for 5.59% of Japan s total GDP in 213. However, due to the country s top trading partners sluggish economic situation namely the United States and the EU s, Japan s economy experienced a negative growth rates in 211 by -.45%. While Japan s economy experienced a positive real GDP growth rate in 212 and 213, the country experienced another economic contraction partly due to the negative contribution of consumption caused by an increased consumption tax. Japanese economy has long been facing structural problems with its decreasing and aging population trend, low domestic demand and its economic contraction. 7 Aiming to secure an average annual growth rate around 2.%, Japan has initiated the Japan Revitalization Strategy (first initiated in 213, revised in 214) at all levels of government 7 Japan s population growth rate started showing a decreasing trend from 29 and recorded -.16% in 214 (World Bank). 59

60 and industry to boost the nation s labor and capital productivity growth. 8 The strategy includes the following three plans: the industry revitalization plan, the strategic market creation plan and the strategy of global outreach, which is expected to boost the supply side of the economy and support the nation s information industry, in particular. Figure 7.1 Trend of Japan s GDP and GDP growth Unit: million USD(left), %(right) Source: UNCTAD ( ) 7.2. Trade Japan is one of the largest trading countries in the world, the fourth largest in the world. However, trade does not account for a significant share in Japanese economy, consisting only 35.1% of Japan s total GDP in 213(World Bank); however, it has been the new driving force of Japan s economic growth in the 2s. Japan s share of world trade has shown a decreasing trend. Japan s export share decreased from 7.67% in 2 to 3.81% in 214, and 8 Japan Revitalization Strategy

61 the country s export continued to decrease for three consecutive years from $ 799 billion in 212 to $69 billion in 214. The country s imports also showed a decreasing trend during the same period from $886 billion to $812 billion. However, the country s world import share was robust from 2.49% to 2.83% during the same period. Japan s top export and import partners did not change significantly for the past decade. The country s top 5 export partners remained the same, the United States, China, Korea, Taiwan, and Hong Kong. Russia was the 17th largest exporting destination and the 1th largest importing source for Japan. China was the second largest export destination and the largest import source; and Korea was the third largest export destination and the seventh largest import source. Japan s trade relationship with Mongolia is not significant in values and share. However, Japan and Mongolia has signed an EPA in February 215. The EPA between the two countries is expected to enhance the economic cooperation between the two countries in the infrastructure construction, engineering, and mining sectors. In part of the strategy of global outreach plan within the revitalization strategy, Japan is actively pursuing FTAs with large trading partners, which includes China-Japan-Korea FTA, RCEP, TPP and Japan-EU FTA. Japan is also initiating an active SME support policy targeted towards the Asian markets and the Cool Japan initiative, Japan as an attempt to spur economic growth. 61

62 Figure 7.2 Trend of Japan s Export (FOB) Unit: million USD(left), %(right) Source: IMF.215.Direction of Trade Statistics ( ). Figure 7.3 Trend of Japan s Import (CIF) Unit: million USD(left), %(right) Source: IMF.215.Direction of Trade Statistics ( ). 62

63 Table 7.1 Top Export Partners of Japan USA China China China USA USA 2 Taiwan USA USA USA China China 3 Korea Korea Korea Korea Korea Korea 4 China Taiwan Taiwan Taiwan Taiwan Taiwan 5 Hong Kong Hong Kong Hong Kong Thailand Hong Kong Hong Kong 6 Thailand Thailand Thailand Hong Kong Thailand Thailand 7 Singapore Singapore Singapore Singapore Singapore Singapore 8 Germany Germany Germany Germany Germany Germany 9 Malaysia Malaysia Malaysia Indonesia Indonesia Indonesia 1 Netherlands Netherlands Netherlands Australia Australia Australia Source: IMF.215.Direction of Trade Statistics Table 7.2 Top Import Partners of Japan USA China China China China China 2 China USA USA USA USA USA 3 Korea Australia Australia Australia Australia Australia 4 Taiwan Saudi Arabia Saudi Arabia Saudi Arabia Saudi Arabia Saudi Arabia 5 Indonesia UAE UAE UAE UAE UAE 6 UAE Korea Korea Korea Qatar Qatar 7 Australia Indonesia Indonesia Indonesia Korea Korea 8 Malaysia Taiwan Malaysia Malaysia Malaysia Malaysia 9 Saudi Arabia Malaysia Qatar Qatar Indonesia Indonesia 1 Germany Qatar Thailand Thailand Germany Russia Source: IMF.215.Direction of Trade Statistics As for sectoral distribution, there were no significant change in the major export and import sectors but the distribution has diversified in both import and export from 2 to 63

64 214. In 214, Japan s top export sector were the Machinery and transport equipment sector accounting for 58% of Japan s total export followed by Manufactured goods(13%), and Chemicals(1%). Whereas, the top three export sectors in 2 were Machinery and transport equipment sector (69%), Manufactured goods(1%) and Miscellaneous manufactured articles(9%). The diversification trend was clearer in Japan s import change. Mineral fuels accounted for a total 32% and became the top import sector of Japan while it was machinery and transport equipment in 2 with 28%. In 214, the major import sector of Japan included machinery and transport equipment (24%), and manufactured articles(12%) sectors in 214. Figure 7.4 Trend of Japan s Export to GTR countries unit: % Source: IMF.215.Direction of Trade Statistics( ). 64

65 Figure 7.5 Trend of Japan s Import to GTR countries unit: % Source: IMF.215.Direction of Trade Statistics ( ). Figure 7.6 Export Structure of Japan unit: % Note: Commodities of SITC, Rev.3 Source: United Nations Commodity Trade Statistics Database (UN Comtrade). ( ) 65

66 Figure 7.7 Import Structure of Japan unit: % 2 15% 2% 11% 1% 7% 28% 2% 9% 7% % Note: Commodities of SITC, Rev.3 Source: United Nations Commodity Trade Statistics Database (UN Comtrade). ( ) 7.3 Foreign Direct Investment Japan s position in the world total investment is much smaller relative to trade. In terms of flow, Japan s inward FDI only accounts for.17% in world s total inward FDI flow in 214 with only $2 billion. United States ranked as the top investor to Japan in 214. Other important country partners included Hong Kong, Singapore, Taiwan and Luxembourg. Under the Japan Revitalization Strategy of 214, Japan has set a target to double the outstanding amount of FDI in Japan to 35 trillion JPY by 22 and willing to reduce the tax and administrative costs, simplifying licensing and approval systems to promote IFDI. Japan s outward FDI s share in world total OFDI is much bigger than Japan s IFDI and 66